U.S. antitrust regulators fear "Rockstar" coalition could litigate Android phonemakers to death

The smartphone
war continues to rage on and Google Inc.'s (GOOG) Android has stepped out
into the lead. It outsold Apple, Inc. (AAPL) smartphones over 2 to 1 globally in the last quarter.
And minority players like Microsoft Corp. (MSFT) were struggling to cling
on to insubstantial market shares.

I. Google: Market Champion or Buying Time?

Android's race to the top was fueled by its support of an open ecosystem in
which players like Motorola Solutions Inc. (MSI),
Samsung Electronics Comp., Ltd. (SEO:005930), and HTC Corp. (TPE:2498)
could all make Android devices without direct licensing fees (Google profited
off of app sales and mobile advertising).

The result was an ecosystem which frequently delivered hardware that was more
advanced than Apple, Research in Motion, Ltd. (TSE:RIM),
and Microsoft's offerings. And not only was the hardware better, the
selection was broader too.

But despite the appearance that Android won, the ecosystem is now facing the
looming potential of doom. That doom could come thanks to Apple, RIM, and
Microsoft's growing portfolio of purchased intellectual property and desire to
sue Android handset makers into submission.

The combined picture is clear. Apple and Microsoft have sued or entered
into sweet licensing agreements with virtually every major Android maker (a few
like LG Electronics Inc. (SEO:066570)
have been spared, presumably on the merits of their smaller market share).

II. Android Faces Death by Multiple Means

The question becomes whether Android handset makers can remain viable in the
face of these lawsuits. While a $15 USD licensing fee to Microsoft might
not be lethal, if Samsung and HTC have to pay an additional $15 USD to Apple
and $15 USD to Oracle, the result may be the phones will become unprofitable.

On the other hand, if Google's handset partners refuse to play ball, they may
be forced to pay even worse damages by international courts.

Apple, Microsoft, and others have multiple routes to use
their intellectual property to kill Android.

Google hoped to win the portfolio, bidding $900M USD.
It insisted that its purposes for acquiring it would be peaceful.
In its blog its Senior Vice President and General Counsel Kent Walker explains,
"[O]ne of a company’s best defenses against ...
[patent] litigation is (ironically) to have a formidable patent portfolio, as
this helps maintain your freedom to develop new products and services."

The comment would prove fortuitous, as Google was beat by a shadowy bidder
calling itself "Rockstar Bidco". That bidder offered up $4.5B
USD, an offer that was embraced by a cash-thirsty Nortel, leave Google's
potential offer in the dust.

So who was Rockstar Bidco? Turns out it was none other than Apple,
Microsoft, RIM, and three other companies -- the same players who are working
to use their already substantial IP to try to sue or license Android handset
makers into the red.

IV. U.S. Antitrust Regulators May Step In

The plot to kill Android is so obvious that it has top antitrust experts
screaming foul. Robert Skitol, an antitrust lawyer at the Drinker Biddle
firm, opines in a Washington Postinterview, "Why is the portfolio worth five
times more to this group collectively than it is to Google? Why are three
horizontal competitors being allowed to collaborate and cooperate and join
hands together in this, rather than competing against each other?"

Brian Kahin, a senior fellow at the Computer & Communications Industry
Association, adds, "The one thing that's significant here is you have
three of the four smartphone platforms ganging up on the fourth. You want
patents for an economic benefit, not as a legal instrument."

The questions Mr. Skitol and Mr. Kahin raises are reportedly being echoed among
top U.S. antitrust officials. Pressure is mounting for the U.S.
government to block or place serious restrictions on the "Rockstar
Bidco" acquisition of the Nortel IP.

The American Antitrust Institute sent a letter to the U.S. Department of
Justice, begging them to limit the purchase.

The sale is set to be made official on Nortel's antitrust proceedings today,
though regulatory approval still awaits.

Mr. Walker says the outcome of the pending sale could be a matter of life or
death for the Android ecosystem and free market. He states, "This
outcome is disappointing for anyone who believes that open innovation benefits
users and promotes creativity and competition. We will keep working to reduce
the current flood of patent litigation that hurts both innovators and
consumers."

V. From Bully to Victim: Google's Unusual Situation

Google clearly won't go down without a fight, nor will its handset partners.
But if the intellectual property pressure grows too great, the Android
coalition may be rendered unable to compete.

The situation is highly unusual, due to a number of reasons. First,
Google itself is the subject of antitrust scrutiny on reports that it abused
its dominant Android position to bully service providers. Second, the
case represents a situation in which small players are able to team up and
legally damage a clear-cut market leader -- a relative rarity.

Thus Google -- which of late has become viewed as a bully of sorts -- finds the
tables turned, and finds itself a clear victim.

VI. The Big Picture

While the possibility that Android, a beloved smartphone institution, could be
sued out of existence by Apple, Microsoft, et al. is alarming to many, this
incident in many ways serves most of all to illustrate much broader problems
with the U.S. intellectual property system.

Companies in the U.S. are laying claim to increasingly generic intellectual
property and using that IP as instrument not to innovate, but to litigate.
The street runs two ways in most cases -- often times IP lawsuits are
followed by IP countersuits [1][2]. But often one player in the market is
using IP as the general bully, while the other is trying to defend itself.

Many argue the U.S. desperately needs intellectual property reform. But
the federal government under both former President George W. Bush (R) and under
President Barack Obama (D) has been slow to act.

The Nortel sale should offer a key signal to the market. If the federal
government blocks it, it may be a sign that the era of using IP as an offensive weapon is coming to an end. On the other hand, if it's approved without
restriction, it will offer a virtual blueprint of how to defeat your
competitor. If the latter scenario plays out consumers may find
themselves in an odd market where it's not the competitor with the best
products that wins, but the company with the best lawyers and patent portfolio.

"I'm an Internet expert too. It's all right to wire the industrial zone only, but there are many problems if other regions of the North are wired." -- North Korean Supreme Commander Kim Jong-il